Will the Cloud Change the Industry Giants or Will the Giants Change the Cloud?
Over the past couple of years or so the technology giants such as IBM, HP, Cisco, Oracle and Microsoft have all announced cloud strategies — all with promises of multi-billion dollar investments backing these strategies up. Some have even predicted that cloud computing is the key to their future over the next ten years. This type of affirmation from these industry leaders is pretty heady stuff for a cloud industry in its own infancy…but will it become a reality? Will the industry leaders of today’s technology market be the leaders of tomorrow’s?
Most people following this market will say “absolutely,” even though the majority of cloud innovation continues to flow from early stage start-ups in this space today. It is also clear that the technology giants have both the cash reserves and the desire to take a leadership position in the cloud through acquisition. But is this enough?
The biggest obstacle to the giants achieving their ultimate goal of owning the cloud may be in their existing business models. The very same business model that has been the envy of the industry for the past thirty years may, in fact, be a roadblock to owning the cloud unless something changes.
Companies such as IBM, HP, and Oracle have been built largely on top of enormous distribution channels of direct sales and support personnel to attract new and maintain existing customers. While these channels have been the envy of the industry for the past thirty years, they also come at an enormous cost that must be compensated for in these companies’ pricing models. Conversely, the cloud’s on-demand pay-per-use business model (often defined as the “anti-lock-in” model) may be the antithesis of the enterprise site license that was popular in the 80’s and 90’s. Most importantly for publicly traded companies is that the cloud’s on-demand model offers limited visibility into projected or future revenue streams, which is a major issue in delivering guidance to share holders. Even worse, the average deal size for on-demand servers ranging from $.10 to $.80 per server hour rarely, if ever, goes over $100,000, let alone the $1M threshold that commonly justifies the existence of a direct sales organization. So the problem is, how do these companies sell cloud services? Their existing channels are focused on $1M deals, so getting their attention on a $50,000 cloud services deal may prove to be problematic. Developing a new organization around selling cloud services may cause some major internal channel conflict.
These challenges may explain why there have been more announcements and declarations than actual cloud successes so far from the industry giants. That said, I would not bet against them, as cash is still king…but I suspect independent cloud divisions will have to be formed to achieve any quick success. It also means that lean and agile cloud start-ups that are evolving from the beginning around an on-demand model model have more of a fighting chance than start-ups in previous generations. I, for one, am looking forward to seeing how the cloud market plays out between the “Davids” and the “Goliaths.”
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